This happened to me before the update. The problem, I found, was that the red mushroom circles gave glimmerdust a lot less frequently than the patches and the normal rings (so it worked out to be less in the long run). If they increased the frequency of the drop, I'd love to know.
You have to tap the swords to fight it now. It didn't appear to matter which one I tapped.
After the update, it takes 15 wood for one Fancy Beam, 15 wood for one sheet of paper and 15 wood for one hammer... I really think that's a bit much, especially when were limited on the number of saw mills we can have. (And its basically saying it takes two full trees to make one sheet of paper or a single hammer?)
Also, items that were previously unlocked in the Magical Forge are now locked and the builder's hammer has been moved to the workshop, it pretty much renders the Magic Forge useless except for long swords until level 28..I believe it was.
Sorry, that would be level 24 for the Knight's Axe.